Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Friday, February 26, 2010

With increasing frequency, it is proposed that restaurants should post on their menus nutritional information. The restaurants resist this because they think it may shoo customers away, or at least make them eat less (assuming they underestimated the calories, which may not be always true). But if they eat less, why not make portions smaller and thus reduce costs and possibly increase profits?

Bryan Bollinger, Phillip Leslie and Alan Sorensen observed Starbucks outlets in New York City as such a calorie posting policy was implemented. They got data about each transaction in a NYC outlet for a 14-month period, including 11 months with calorie postings, as well as in Boston and Philadelphia, which act as control groups. They finding that the posting reduced calories per transaction by 14 units, 10 coming from fewer purchases and 4 from switching to a lower calorie item. You may think this would be bad for Starbucks? Think again, there was no significant change in revenue, in fact there was even a 3% increase for Starbucks outlets close to Dunkin Donuts: the calorie posting attracted clients from competitors.

Thursday, February 25, 2010

As described in a previous blog post, CEOs are not as expensive to a firm as commonly perceived, and they are are real bargain. Still, you have sometimes to wonder why some CEOs stay in charge despite lackluster performance. Is the board asleep at the wheel? The conventional wisdom is that it is all an inside job. As the CEO selects the board and the board selects the CEO, they all protect each other. And when a CEO really needs to be replaced, he is chosen among the members of the board.

Meg Sato advances that there could be another reason. It is all about rent seeking. The board may have interests that differ from shareholders, and thus wants to appoint or keep a CEO who performs in its eyes, but not in the eyes of shareholders. This happens because the CEO is kind to the board and will minimize the leakage of the surplus of the board.

The way this is analyzed is by model this as a Nash game, where CEO wage, costly CEO monitoring and CEO succession policy (internal vs. external) are determined. Because the board does not internalize the welfare of an outsider CEO candidate, it will tend to prefer an insider and monitor him little. Because CEO skills are perfectly observable ex-ante, such skills matter more in heterogeneous industries, and incumbents or insiders have acquired firm-specific knowledge, heterogeneous industries should have more insider CEOS and and longer CEO tenures. While this paper is purely theoretical, other empirical work confirms this conjecture.

Wednesday, February 24, 2010

There is a new movement, led by Ron Paul, that seeks an audit of the Federal Reserve. This movement is driven by a mixture of conspirationists who think the Fed is controlling the world, people seeking to blame someone for the crisis and people who think that monetary policy should be more transparent.

William Barnett would in the latter category and thinks that the Fed makes decisions based on data of really poor quality and that an independent institution should be created to draw monetary statistics. Then both the public and the Fed would be better informed. But one could ask why the Fed would not do that itself. It is probably trying to get as good data as it can, yet one can see that there is an agency problem here: given that monetary policy is rather secretive in the US (there are no explicit targets, Board minutes are released with a significant delay, there is no official pronoucement on the current monetary stance) compared to other countries, hiding data allows to maintain this secrecy. There can be good arguments why you would want to conduct such untransparent policy, but by now counterarguments seem to prevail and the drive for an audit may just be a way to force the Fed to adopt policies that are common elsewhere.

But this is not the reason Barnett wants an independent monetary statistics agency. He thinks the Fed is basing its decisions on faulty data, and in particular that it should be using the Divisia index of money, a weighted index of various monetary aggregates that is supposed to better represent the transaction role of money. The current data definitions used internally would not survive a proper accounting audit, he claims. An audit would force the Fed to revise its data practices. Even better, putting data collection outside of the Fed would remove potential perverse incentives of having the institution that influences data by policy also collect it.

It needs to be clear that an audit would not change the policy independence of the Fed, and every serious economist agrees that politics should not interfere with monetary policy. An audit would be about accounting practices, not business decisions. In this respect, one should rather be worried about this newly found collaboration between the Fed and the Treasury Department, which gnaws at the very notion of independent central bank policy.

Tuesday, February 23, 2010

In the United States, and elsewhere, there is an endless debate on whether estates should be taxed. Yes, if bequests are accidental and redistribution is indicated. No if taxation would limit asset build up and entrepreneurship. What impact does estate taxation actually have?

Tullio Jappelli, Mario Padula and Giovanni Pica look at the repeal of the estate tax in Italy in 2001 and use micro-data to compare the size of real estate inheritances before and after the reform. They concentrate on real estate because 85% of the wealth of elderly is in real estate. The data is also interesting because it includes households who were not subject to estate taxation before 2001. This is important, as the reform was a big package that included other tax decreases. The authors find the two percentage points more (from about 30%) leave real estate to their descendants. This is not large, and it is not clear whether this is the consequence of previous tax avoidance and tax evasion, a prevalent problem in Italy, rather that increased estates.

Monday, February 22, 2010

In the nineties, Eastern European economies went through a profound and painful transformation. There were hit by two major shocks: A change in the price system from administered prices to market price, and an opening of the economies to competition from abroad. The first impact of these shocks were very significant drops in the wages and in all manufacturing indicators. As mentioned, these changes were painful, and one could ask whether something could have been done to help ease this transition, for example with foreign aid. It is difficult to imagine where this question could matter in the future (North Korea?), but anyway.

Mohsen Fardmanesh and Li Tan ask this question. They build a two-sector three-factor small open economy model with some particular features: capital never depreciates, trade is fully open, and firms maximize profits. To make model resemble in some way the pre-transition situation, they add a constant to the market clearing condition for non-traded goods to represent shortages. Removing this constant is supposed to represent the change that happened. Then the economy is a new state, and they analyze the impact foreign aid would have had.

This is completely silly. The object of study here is the transition from a steady state to another one. To do this properly, you need to model properly the dynamics. In this case this means: 1) model properly the command economy, showing the allocation of factors across sectors, and in particular modeling technology vintages; 2) model properly the market economy the model is converging to; 3) using the initial factor allocation, show how the economy evolves on the path to the new steady state (it is not instantaneous...) as factor need to be reallocated and in particular become obsolete as the economy is exposed to foreign competition; 4) it helps to model a labor market in order to say anything about wages; 5) introduce households so that anything could be said about the welfare impact of foreign aid, which is the research question after all.

Saturday, February 20, 2010

A little know feature of the Acrobat Reader is that it can read out loud papers to you. I find it actually quite impressive how a free software can do that, but do not really see the use of it, apart from the fun factor. Or maybe when you need to read papers while driving. Anyway, the voice reading is rather monochordous, while English is a language that is much more sung, compared to other languages. Thus it sounds really boring.

I just came across a website that allows you to translate a web page into music. Code Organ is based on the letter appearing in the web page and selects the scale, instruments and drum loop. And it works with pdf files as well. Now you can read your paper with the "appropriate" music.

Friday, February 19, 2010

Sports personalities are often packaged as role models for future generations, implying that their workj and perseverance has paid off, and one should emulate this. One consequence is that when a sport star emerges, it should attract many in his sphere of influence to do the same thing. An example would Tiger Woods enticing many blacks to pick up golf. This is much like many boys would to become firemen after seeing a firetruck rushing down the road. But does this work at all?

Arne Feddersen, Sven Jacobsen and Wolfgang Maennig analyze the supposed Boris Becker effect, that more people picked up a tennis racket with the successes of Boris Becker, Stefi Graf and Michael Stich. Well, it turns out it did not work that way at all. With the rise of these stars, tennis memberships went down, and after their retirement, they went further down. The latter efect would be expected, but not the first. While this is just one data point in studying the impact of role models, it is quite puzzling. The authors have three untested hypotheses: fatigue from over-exposure to tennis, the belief that such performances can only be the result of doping, and discouragement that the stars' results are unreachable. Intuitively, I have my doubts about all three. This remains a puzzle.

Thursday, February 18, 2010

In developed countries, human resources in health care are very scarce, and medical institutions have been aggressively hiring in developed countries. While this is good for developed economies, this is much worse for developing ones, as human capital is harder to come by. Having your best people leave makes it difficult to justify investment in upper level education. What could then be made to help reduce this medical brain drain?

One proposal is to improve medical infrastructure and thus make working in the medical sector in developing economics more appealing. This can be done through foreign health assistance, that is development aid targeted towards medical facilities. Yasser Moullan says this works remarkably well, especially in less corrupt countries. This implies that the main reason that physicians are moving North is not the pay, but rather the working conditions.

Wednesday, February 17, 2010

Why do people divorce? One spouse having some "escapades" is grounds for divorce, but it is a relatively rare occurrence. Much more frequent is "unhappiness." That is obviously difficult to quantify as this is fundamentally subjective, and it usually not advised to compare measure of happiness across people. Yet, analyzing such data is quite revealing.

Cahit Guven, Claudia Senik and Holger Stichnoth show that divorces are predictable by self-reported happiness gaps within couples. One interpretation is that somehow within couple transfers of utility are not working (one spouse is not making concessions). And divorce is more likely to happen if the wife in unhappy. That should surprise no one. What would be really interesting here is to see what the expectations are. After all, happiness is all about how expectations are met. And I wonder whether women have relatively high expectations from marriage, and the disappointment of not meeting those expectations leads to unhappiness and then divorce. But that is probably even more iffy to measure than happiness.

Tuesday, February 16, 2010

We sink a lot of resources into our children, be it in time or money. while they are children, the return is largely non-material. Thereafter, there can be a material return, directly if children support their parents during old age (and often the support still goes the other way), or indirectly if there is a pay-as-you-go social security system. Given this lack if private return in children, and that it is lower than the social return, there is underinvestment in children, in quantity and quality. This can be corrected with subsidized schooling and fertility incentives.

Alice Schoonbroodt and Michèle Tertilt make the argument that all this could easily be resolved by giving parents the full rights on the income of their offspring. Then they would get the full return of their investment and have socially optimal fertility and investment. Of course, this is not possible, first because of human rights, and second because children cannot be committed to give up their income. But there was a time where parents could exert such control, and then fertility was also higher. In other word, altruism is not the only reason for fertility.

This brings another interesting aspect on the paper. Under normal circumstances, the Coase Theorem would apply, but here it cannot as parents cannot contract with unborn children, and the latter cannot make promises to their parents. This inefficiency can only be resolved with public intervention, either by by giving property rights to parents, or by giving parents appropriate incentives, financed by taxing children. The fact that fertility is endogenous, contrarily to what is typically assumed, has another consquence: the standard results that allocations are efficient if the interest rate is higher than the population growth rate is not necessarily valid, because of under-fertility in addition to the usual problem of over-saving. In other word, endogenous fertility is very important, and all these social security models that just assume fertility is reduced are missing something big.

Monday, February 15, 2010

In the context of rising health care costs, especially for prescription drugs, it is crucial to understand the price elasticity of these drugs. Indeed, given that one has to think about how to optimally design prescription drug coverage so that insureds have the right incentives. Indeed, the current regime of lump-sum co-pay (or zero cost) prevalent in so many systems quite obviously leads to overconsumption and excessive market power for drug companies.

Marianne Simonsen, Lars and Niels Skipper exploit extensive (20% of the population!) Danish data on drug use as well as the heterogeneity in the kinked price schedule Danes face to estimate the price elasticity for various consumers and drug categories. The general conclusions, demand is price inelastic, with elasticities ranging from -0.08 to -0.25. It should be no surprise that lower incomes are more price sensitive or that more useful drugs are less (life prolonging, preventing health deterioration), but I find it somewhat puzzling that less educated people are more price sensitive, given that income is already controlled for. Same for the lower price elasticity for the elderly. The authors conjecture that the latter has to do with lower life expectancy making investment in health less worthwhile. I am not completely convinced, as health issues are much more concrete for the elderly than for the young.

Saturday, February 13, 2010

Getting tenure in many academic institutions is very stressful, as requirements are high, and often higher than for those who obtained tenure before and decide on one's fate. It should thus not be a surprise that some people crack, in one case unfortunately leading to a shooting spree yesterday.

But is tenure really worth all this stress? Tenure decisions too frequently lead to internal strife, and someone who has finally obtained tenure after a long battle and appeals ends up leaving anyway most of the time because relationships with colleagues are strained. And even in clear-cut tenure cases, tenure is not Nirvana. Take this nice presentation of myths about tenure from the National Education Association. In short, tenure does not guarantees a lifetime job. It only gives a right to due process. And there are plenty of ways to make a tenured professor feel the consequences of under-performance. Also, it appears that on average tenured faculty teach and publish more than untenured ones. And academic freedom is not much different whether one is tenured or not.

Tenure is not what it is advertised to be. With tenure, one is virtually locked in place, as other institutions would not hire you without tenure, and hiring with tenure is a huge deal and thus much less likely. Being unhappy with tenure is worse than unhappy without tenure in some cases, as mobility is higher in the latter.

In my case, I wished tenure were not an option. I do not need tenure as a motivation to teach well and do good research. I am sufficiently interested to continue doing so after getting tenure. Tenure does not change anything. I am not interested in promotion, as it really mans taking on responsibilities that I can do without, like sitting on useless committees. Just evaluate me, reward me and punish me according to my performance. And if I am not happy about how I am treated, just let me test the market without having to force my tenure on other institutions.

Friday, February 12, 2010

Current global imbalances are mostly the mark of what is happening in the United States and China. And how the two are interacting, one could argue, is all that is going to matter. Pessimists view the current imbalances as the result of large domestic distortions and problems in international financial and monetary markets. Optimists consider the situation to be part of a normal adjustment and everything will automatically be fine.

Célestin Monga tries to reconcile both views using Hegel's approach of self-consciousness and the lordship-bondage relationship. Yes, we can apparently understand global imbalances using philosophy. The idea is the following: The Unites States and China have become largely interdependent and cannot ignore each other. Even if one has dominating position on the other, it can exploit the situation. Think of a fight to death between two adversaries. The winner becomes the master, but there is nothing left to dominate as the other is dead. The same would happen with the other winning. Both realizing that they so reliant the other, the solution is not to kill the loser, but to enslave him. But over time, the slave adapts and makes the master totally dependent on him and becomes more powerful.

How does this brings us to US-China relations? First ignoring each other, the US takes center stage with the Industrial Revolution, and China's 5000 year history takes a back seat. But since China has regained economic power and is on the verge to become the second economy in the world, both economies wage a battle for economic supremacy, best visible on the position with respect to the "manipulated" renminbi/dollar exchange rate (US position) and the "concerns" about the US dollar (China position). But both cannot ignore how intertwined they are, just have a look at the trade and capital accounts. This implies that they cannot unilaterally take policy decisions without considering very seriously how they other would react. They are locked in a Nash equilibrium, and at this point both are masters and slaves.

Should we not use philosophy and psychology instead of macroeconomics to understand global imbalances? Is this an example of behavioral economics going too far? We tend too often to think that countries act like a representative agents, and this analysis takes it to the extreme. One cannot ignore that some factors here are solely dependent on government decisions (exchange rate, monetary policy), that make it look a country acts as one, and is thus locked in a two player game. But this hides considerable heterogeneity of agents within, but while they face the same prices, their impact varies a lot: some are exporters, some importers, some directly, some indirectly. And government policies are a reaction to all this heterogeneity. I think our macroeconomic models are still more useful than Hegelian conjectures.

Thursday, February 11, 2010

Now that there is technology to avoid ads on television, advertisers are willing to pay less to air their announcements. What consequences would such a loss of revenue have on the television landscape?

Torben Stuehmeier and Tobias Wenzel say that the reduced profit opportunities should reduce entry (or favor exit) from the free-to-air television market. Note, however, that those how avoid ads are those who are bothered by them. The remainder are those the advertisers want to reach, so ads may become more numerous. In contrast, pay-TV (either pay-to-subscribe or pay-per-view) should be able to charge more for subscriptions to compensate for the reduced ad income. There is no change in revenue.

Thinking about welfare, the TiVo customers have the same utility as they pay for their subscription what they think ad avoidance is worth. But for everyone, there are now fewer channels to chose from the free-to-air market and consumers are worse off. In a pay-TV market, welfare is also reduced, as non-users pay more for subscriptions. Now extend the model of Stuehmeier and Wenzel to allow both television industries to co-exist and compete against each other. As customers have fewer free options, they will go towards the pay channels. The end result: a similar number of channels, but more you have to pay for. Consumer welfare was reduced by the availability of the TiVo box.

Note that the authors have a different concept of welfare than me. They consider not only the consumer surplus, but also television industry profits. Why would one want to consider the latter? If the argument is that it increases the income and thus the consumption of someone, why not model it explicitly? And given that the only good produced in this model is differentiated television channels (with a bad through ads), that is all what counts. Profits are just a monetary illusion here.

Wednesday, February 10, 2010

There is always considerable interest in learning about current economic conditions, just see how financial news concentrates on the impact of the latest data releases on where the economy stands now. Actual data on GDP, for example, is released with a four month lag, and is subject to revisions. One could thus try to forecast current GDP in real time, nowcasting.

Boragan Aruoba and Francis Diebold assess the current state of nowcasting. There is rather little data available for nowcasting, as one needs data that is of higher frequency and quickly available. One can then work using dynamic factor analysis, which is about finding some commonness among them and interpreting this as current macroeconomic conditions. While this is now an established art and a real-time index is now maintained by the Federal Reserve Bank of Philadelphia, the Aruoba and Diebold paper is mainly about adding a nominal factor to the analysis that summarizes information about inflation.

These factors seem to tract quite well in real time historical data. This allows to draw some conclusions already about the current recession. First, it is unusually deep and long, which should not be a surprise too many. Second, it seems to have ended in July 2009. However, one could not exclude that a double-dip recession is in the works. Finally, there is still of increase in inflation visible.

I wonder whether this paper will be frequently revised to adjust for progress in the literature, something like nowreviewing nowcasting.

Tuesday, February 9, 2010

Some aggregate shocks can have a very large and costly impact. Not your typical business cycle in a developed economy, but rather shocks like earthquakes, droughts or major hurricanes. They put a lot of strain on affected regions, who would clearly gain from acquiring some sort of insurance against such adversities. Robert Shiller has been advocating cross-country insurance mechanisms against GDP fluctuations (say ... markets), but it calamities would have an even more pressing need for that.

Joanna Syroka and Antonio Nucifora explore this in the case for draught insurance in Malawi. With the help of the World Bank, this country is now offering a derivative contract based on index computed from the measurements of 23 weather stations in the country. The hope is that if international markets buy these instruments, the financial consequences of weather fluctuations will be born outside of the country, and macroeconomic stability will help growth and poverty alleviation.

It will be interesting to see whether there will be demand for these derivatives. Experiments have run in Ethiopia and Mexico, but in both cases it was with re-insurers. This time, a government is directly involved. If this works, there are many other candidates for this, think for example Bangladesh, whose GDP depends crucially from the yearly monsoon. And once such markets are well developed, smaller risks like GDP fluctuations in GDP countries may be insurable as well for governments.

Monday, February 8, 2010

What makes a sports league more competitive? More interesting? And more profitable? We have two basic models out there. The European model, with open entry, promotion and relegation on mostly athletic grounds, and the American model, a cartel with regulated entry and no exit except on economic grounds. Basic economics should tell us that an American league should be more profitable but of lesser athletic quality, while the European one should be providing more value, both in terms of quantity and the quality of the good (say, athleticism and entertainment).

Helmut Dietl and Tobias Duschl confirm this conjecture. Indeed, the six top revenue generating teams are European, but some of them are still not profitable, and as in the case of Manchester United, despite significant athletic success. Dietl and Duschl use platform organization, a form of two-sided market theory, to get some better understanding of sports league organizations. In this regard, European leagues can be compared to open source like Linux, open and performing, while American leagues are like Windows, underperforming but most profitable.

Table 2 from the paper summarizes well the differences between the leagues. In European ones, most clubs are members' associations that try to maximize wins. Leagues are open (promotion/relegation), there is full market coverage, hardly any relocations (I cannot think of one), and no salary caps. As a consequence, value (as defined by athleticism or entertainment) is maximized. Contrast this with American leagues, where clubs are privately owned and maximize profits. League are closed, there is rationing, frequent relocation and a salary cap. Thus, American leagues maximize value appropriation.

Friday, February 5, 2010

It is now pretty well established that second hand smoke is bad. How do you handle it though? Apparently, the solution is to ban smoking from public places, in the hope non-smokers will not be affected. Now, are bans truly effective? The economist would respond that ban are generally not the solution to a problem of externalities, and that using taxes or subsidies is a much more effective way to address this problem.

Jérôme Adda and Francesca Cornaglia come to exactly this answer as well. They notice that bans are even worse than you think, because smokers smoke as much as before, but more in a private setting, thus exposing more the more vulnerable ones, children. How can you try to reach smokers in their private setting? Not by a ban, which is unenforceable. But by increasing the tax on tobacco products, one can achieve this, even if this means increasing the tax massively. But given that the tax-elasticity of passive smoking is larger than for active smoking, the tax increase need not be as large as you think. And besides, smokers are actually in favor of tax increases, as they see it as a commitment device to quit (Jonathan Gruber and Botond Kószegi).

Thursday, February 4, 2010

How should one discount future events when they are far into the future and there is uncertainty? This seems to be a rather odd question, given that we have the von Neumann-Morgenstern framework. The reason this is still a valid question is that the choice of a discount rate matters a lot for questions regarding the distant future, such as climate change, and even small changes can lead to dramatically different policy recommendations. Thus uncertainty does not necessarily pertain to uncertain future outcomes, but to uncertain future discount rates. Are they going to remain at historic interest rates? And which interest rates?

Christian Gollier and Martin Weitzman have written several papers with a similar premise but dramatically different results: discretize the space of discount rates and then assign probabilities to each. Then, the "average" discount rate to use should either be the highest or the lowest in the distribution. Now, they sat together and produced a paper that resolved this apparent puzzle. They both forgot about marginal utilities! Suddenly, they remembered von Neumann-Morgenstern and that the objective probabilities they where using needed to be adjusted for the intertemporal ratio of marginal utilities. In other words, they finally are using the standard Euler equation that is the basis of asset pricing. And they find that one should use a rather low discount rate.

PS: How do you get something named after you, or reinforce that it should be named after you? Apparently by repeatedly drawing the attention of the reader to it. Gollier and Weitzman do this in this paper, and it is very annoying, especially when their "puzzles" come from a failure to use the appropriate framework. Oh, and did I mention von Neumann-Morgenstern?

Wednesday, February 3, 2010

Who has not dreamt of winning big at the lottery? Not only would one be able to afford all sorts of goodies, one would have less worries. This translates into better mental health and better physical health, knowing how the two are closely linked. It appears, however, that lottery winner do not enjoy better health. Why?

Bénédicte Apouey and Andrew Clark are not particularly interested in lottery winners, but studying them allows to understand the consequences of exogenous income changes on health. They use British data, which avoids the problems with US data, where income has a direct effect on health because of limited access to health care (and because also some lottery winners get murdered). But the problem is that lottery players have different characteristics to begin with. For example, they are less risk averse than others. This implies that they are also indulging in other risky behaviour, like drinking or smoking. Also, we all know lotteries are an institutionalized scam, so beyond being risk taking, lottery players must not be able to understand the consequences of playing. This impairment can have also implications regarding unhealthy behaviour.

So what do we learn from all this? These results are important in the context of the literature discussing more generally the consequences of income fluctuations (macro and micro) on health. The problem in this literature is that everything is endogenous and cannot properly be instrumented for. Thus the idea of using lottery winning, which should be exogenous. But as Apouey and Clark show, that only works if 1) one makes the distinction between physical and mental health, 2) one needs to take into account that lottery players have a different attitude with regard to health to begin with, 3) any aggregate comparisons are going to be fruitless. In other words, looking at lottery players is the wrong avenue unless you have a lot more information about them then we currently have.

PS: This is a FEEM working paper. FEEM specializes in environmental economics. I am still looking for a link between the topic of this paper and environmental economics.

Tuesday, February 2, 2010

Why do humans life in families, while examples of families in the rest of the animal kingdom are extremely rare? Yes, economists have an answer to that.

Marco Francesconi, Christian Ghiglino and Motty Perry say when the evolutionary objective is to maximize the dissemination of one's genes and 1) paternity is uncertain, 2) children need a long time to develop and they overlap during that time, then families are optimal. Why? Because fathers will only care for the children they recognize as theirs. Fidelity of the mother is crucial for this. Add the fact that children need to stay with the parents for a long time, and you have a family.

All this hinges on the assumption that paternity in uncertain. Why did evolution not solve this? It did in a way, as it seems babies resemble more their fathers than their mothers, at least initially, as mothers naturally bond with their children and fathers need a little more "help" (Abstractless reference). Why did such a mechanism not reinforce itself? Probably because the emergence of the family made it less necessary. And maybe the family emerged for other reasons than this, as evolution had found a solution to this problem.

Monday, February 1, 2010

It seems that I am on a vendetta against the myth of rigid prices, but I find it frustrating that macroeconomics keeps insisting on models where price rigidity is crucial despite the evidence that prices are not rigid. I have given plenty of evidence on this blog that retail prices are indeed flexible, in the United States and elsewhere, and even evidence that wages are more flexible than assumed. Too many links to list them here.

But there is also an argument out there that retail prices are only part of the question, producer prices are where the real action is, and those are definitely rigid. If you are such a firm believer is price rigidity, you are in for a big surprise that should make you lose your faith. Pinelopi Koujianou Goldberg and Rebecca Hellerstein show that producer prices are about as flexible as consumer prices that include temporary sales, and more flexible than consumer prices excluding sales periods. So, what is going to be the next line of defense of the religion of price rigidity?